How to Profit from the Dow’s “Dogs”

Small-cap stocks are faring the worst this year and are down nearly 10% from their record-high in late 2013; many would deem this to be an official stock market correction.

Given that small-cap stocks surged upward by more than 33% in 2013, it shouldn’t be a surprise to see this group get the brunt of the selling this year.

Higher-beta stocks, such as small-cap stocks or growth stocks, tend to outperform when the stock market is moving higher, but they are more vulnerable to downside weakness. This is the risk you assume when investing in small-cap stocks.

The reality is that the associated risk of buying stocks is intensified with small-cap stocks, which is why you also need to make sure you have some proven large-cap stocks in your portfolio to help alleviate some of your overall portfolio risk.

I’m not saying that you should avoid small-cap stocks in their entirety, but I do think you should look at adding some large-cap or blue chip stocks if you are devoid in this area.

The advantage of larger companies is that we know these businesses have a proven long-term track record and will likely be around decades from now, whereas small-cap stocks are more vulnerable and may not recover during an economic and market relapse.

A large company can easily absorb several quarters or even years of underperformance but small-cap stocks would have a much more difficult time doing this because they have fewer financial resources.

A classic example of a large company struggling but managing to pull out was McDonalds Corporation (NYSE/MCD). The company faced issues in the 1970s and then steadily rallied into 1999 before facing another downturn until 2003. If you bought the stock at these down points, you would have made a lot of money just by holding the stock.

You can buy the big companies like Wal-Mart Stores, Inc. (NYSE/WMT), The Proctor & Gamble Company (NYSE/PG), and Colgate-Palmolive Company (NYSE/CL) as safer blue chip plays that pay a steady dividend income and have a proven track record for decades, which is often not the case with small-cap stocks.

Yet there are also large companies that have proven themselves over time but are currently facing some issues that will likely be resolved sometime down the road.

Of course, I’m talking about considering buying the “Dogs of the Dow,” which is a strategy used by many to buy out-of-favor large-cap Dow stocks that are currently paying the highest dividend yields due to the stock price trading at lower levels.

As of February 6, the five top dogs of the Dow with the highest dividend yields are as follows: 1) AT&T Inc. (NYSE/T) with a 5.5% dividend yield; 2) Verizon Communications Inc. (NYSE/VZ) with a 4.6% dividend; 3) Intel Corporation (NASDAQ/INTC) with a 3.7% dividend; 4) Chevron Corporation (NYSE/CVX) with a 3.62% dividend; and 5) General Electric Company (NYSE/GE) with a 3.6% dividend yield.

Investors may want to take a closer look at these dividend paying stocks that could pay off in the future, once they are able to convince the market that they are back on track.

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